Cliff Asness: belief

Transcript context

…Last question from me before we get to questions from the group. If policymakers could understand one thing better about financial markets that they don’t understand now, what would you want that thing to be, and why? I’d want them to understand that any form of near certainty without certainty–any time you convince the world that something is a certainty but it’s not, it’s the most dangerous time humanly possible. I’ve looked back at the financial crisis and the key moments in it. A lot of arguments. I’m not even going to get into the partisan arguments. The right says government did it. The left says Wall Street did it. Great shocks. You know what did it, if I had to pick one thing, that one primary cause of the financial crisis? The assumption that real estate prices can’t go down. The government made this assumption, the people who say these terrible quantitative models were way off. At the end of the day, somewhere in this giant model, in a thousand lines of computer code, there was, “What’s the worst case 10‑year return for real estate?” If that worse case was not losing money, it’s garbage in, garbage out. You can have the best model in the world. That’s a problem. When Lehman failed, we went into a huge spiral, because people were pretty much convinced that the government wouldn’t let anyone fail. When money markets, when the famous Reserve Fund broke the buck — this is money markets that are supposed to return you a dollar for a dollar. It’s always been a fiction, by the way. You’ve been lied to for years. Money markets own portfolios of short-term bonds that move in value. They allow them to round to (I could be off by a decimal place) to only two decimal places. That’s not a lot. Two decimal places for short-term securities means most of the time, almost all the time it rounds to a dollar. Therefore, there’s an illusion, but they’re risky. That is to me a very dangerous asset, because it tells people there’s no risk when there’s actually is risk. I’m not saying you have to go out a billion dollars. No one wants an NAV. What’s your NAV? Pi. No one wants that. But it’s so short, it artificially looks stable. When you tell the world there’s risk in something, and then bad things happen, it’s not fun. It’s still bad things. But, they tend to deal with it much better. Many people have observed, the Internet tech bubble that I keep talking about, when that came down, the economic consequences, the threats to our system were far more benign. I think that’s because no matter how crazy they might have gone, nobody thought they’re utterly riskless. They didn’t act as a group as if there was no possible problem. Equity losses are expected. Bond losses are not expected. So I will say this. If you truly can take all the risk out, great. If you tell everyone it’s risky and it’s risky, great. I think the thing people don’t appreciate is how dangerous things are that you think protect you, but only mostly protect you. We’re having a forum here Monday with Greg Ip.…

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